ONEBEACON AMERICA INSURANCE COMPANY et al v. JOHNNY'S SELECTED SEEDS INC
ORDER Granting Judgment on the Stipulated Record By JUDGE JOHN A. WOODCOCK, JR. (jgw)
UNITED STATES DISTRICT COURT
DISTRICT OF MAINE
INSURANCE COMPANY, et al.,
JOHNNY’S SELECTED SEEDS INC., )
ORDER GRANTING JUDGMENT ON THE STIPULATED RECORD
In this declaratory judgment action under 28 U.S.C. § 2201, OneBeacon
America Insurance Company and Massachusetts Bay Insurance Company
(Insurers) seek to establish that they do not have a duty to defend Johnny’s Selected
Seeds, Inc. (Johnny’s) against a lawsuit currently underway in Ontario, Canada. In
the underlying suit, the plaintiffs and cross-claimants allege that Johnny’s provided
them with seeds contaminated with molds and fungi. The parties have moved for
judgment on a stipulated record, and Johnny’s has also moved for an award of
attorney’s fees. Because the Complaint and cross-claims in the underlying lawsuit
show that there is a potential that either OneBeacon or Massachusetts Bay will
ultimately have a duty to indemnify Johnny’s, the Court declares that both
insurance companies have a duty to defend. This duty was clear under Maine law
from the outset of this declaratory judgment action, so the Court awards attorney’s
fees to Johnny’s.
Jurisdiction and Remedy
The Insurers and Johnny’s are “citizens” of different states, and the parties
have stipulated that the amount in controversy exceeds $75,000.00. See Stip. R.
Attach. 2 Statement of Claim, at 003 (ECF No. 22) (Mar. 22, 2012) (Chatham-Kent
Complaint) (claiming $2,000,000.00 plus special damages). Therefore, the Court
has diversity jurisdiction under 28 U.S.C. § 1332. Title 28 U.S.C. § 2201 authorizes
the Court to issue a judgment declaring the legal rights and duties of the parties.
Judgment on a Stipulated Record
The parties submitted this case for judgment on a stipulated record. Pl.’s
Mot.; Def.’s Mot. “[T]o stipulate a record for decision allows the judge to decide any
significant issues of material fact that he discovers . . . .” Boston Five Cents Sav.
Bank v. Sec'y of Dep't of Hous. & Urban Dev., 768 F.2d 5, 11-12 (1st Cir. 1985); see
also Bhd. of Locomotive Eng'rs v. Springfield Terminal Ry., 210 F.3d 18, 31 (1st Cir.
In rendering judgment, the Court must make findings of fact on any
disputed factual issues. FED. R. CIV. P. 52(a). The parties waived any objections to
foundation or authenticity of documents in the stipulated record. Stip. R. at 1 (ECF
No. 22) (Stip.).
OneBeacon America and Massachusetts Bay1 filed their Complaint for
Declaratory Judgment (ECF No. 1) on December 11, 2012. Johnny’s answered on
February 13, 2013.
Answer (ECF No. 7).
The Insurers filed their Motion for
Judgment on a Stipulated Record on September 27, 2013, Mot. for J. on Stip. Record
(ECF No. 21) (Pls.’ Mot.), and submitted with it a Stipulated Record. Stip. Johnny’s
filed a cross-motion for judgment on the record on October 16, 2013. Def.’s Mot. for
J. on a Stipulated R. (ECF No. 23) (Def.’s Mot.). The Insurers opposed Johnny’s
motion on November 6, 2013, Pls.’ Opp’n to Def.’s Mot. for J. on a Stip. R. (ECF No.
27) (Pls.’ Opp’n), and Johnny’s replied on November 26, 2013. Def.’s Reply to Pls.’
Opp’n to Def.’s Mot. For J. on a Stip. R. (ECF No. 28) (Def.’s Reply).
The Complaint and Cross-Claims in the Underlying Suit
In March 2012, Chatham-Kent Organic Epi-Centre, Inc. (Chatham-Kent)
commenced a civil action against Johnny’s Selected Seeds, Tri L Natural Organic
Farms, Inc. (Tri L), Natural Organic Farms, Inc., and Larry Pocock in the Superior
Court in Ontario, Canada.
Chatham-Kent Compl. at 001. Chatham-Kent alleges
that it owned and operated a farm in Ontario. Id. ¶ 2. It alleges that Tri L, Natural
Organic Farms, and Larry Pocock acted as distributers of organic seeds sold by
Johnny’s and in April 2010 Chatham-Kent purchased seeds from those distributors
In further analysis, the Court refers to these two parties as “the Insurers” except where
necessary to distinguish one from the other.
that they had purchased from Johnny’s. Id. ¶¶ 3-5. The Complaint alleges that the
seeds were “contaminated,” that they “contaminated” Chatham-Kent’s fields, and
that the contamination diminished the value of the farmlands because they could no
longer be used for certified organic agriculture. Id. ¶ 6. The Complaint also alleges
“[s]pecial damages in an amount to be proven at trial.” Id. ¶ 1(b).
On October 22, 2012, Tri L Natural and Larry Pocock (Tri L Defendants) filed
an answer to Chatham-Kent’s Complaint and a cross-claim against Johnny’s. Stip.
Attach. 3 Am. Statement of Defence and Crosscl. of the Defs. (ECF No. 22) (Oct. 22,
2012) (Cross-Claim). This pleading alleges additional details not in the ChathamKent Complaint. Tri L, according to the Cross-Claim, leased land from ChathamKent to farm organic vegetables. Id. ¶ 11. In particular, Tri L had two contracts
with SunOpta Fresh Division, a “leading national distributor of organic produce,”
to grow, respectively, “organic potatoes, carrots and broccoli” and “carrots, salads,
green onion, spinach, bok choy, bunched beets, leaf lettuces, leaks and radishes.”
Id. Tri L alleges that “[t]he corn to be grown under the [lease] . . . was intended to
be supplied” to the national distributors “with whom Tri L had supply contracts.”
Id. Chatham-Kent was to serve as “Tri L’s grower.” Id. ¶ 10. In March and April of
2010, Tri L purchased “Frisky seed” from Johnny’s “for the purpose of fulfilling the
[national distributor] [c]ontracts.”
Id. ¶ 19.
Although it refers to the seed as
“Frisky,” the Cross-Claim does not identify the species of seed that Tri L purchased.
See id. ¶¶ 19-21.
The summer 2010 crop did not turn out well. On August 16, 2010, a principal
of Chatham-Kent “emailed Mr. Pocock photos of spoiled corn crops located on the
Lease Property.” Id. ¶ 23. On August 24, Mr. Pocock emailed a sales representative
of Johnny’s with whom he had been dealing, notifying Johnny’s of the rotten crops.
Id. ¶ 25. Mr. Pocock “took the remainder of the seed supplied by Johnny’s for
testing” by an agricultural and environmental laboratory. Id. ¶ 26. The laboratory
produced a disease diagnostic report “confirming that the pathological testing on
the corn seed supplied by Johnny’s returned positive results” for three fungal
pathogens. Id. ¶ 27. According to the laboratory, two of these fungi “can cause ear
rot.” Id. ¶ 28. A second report revealed that soil samples from the leased property
were also contaminated with two of the fungi. Id. ¶ 31. The Complaint alleges that
this “mean[t] the pathogens had infected the soil the corn was grown on.” Id. ¶ 31.
It further claims, somewhat paradoxically, that
[t]he Tri L defendants deny that the damages claimed by the plaintiff
[Chatham-Kent] were caused by Johnny’s Seeds. The damages
claimed were caused by the defective seed supplied by Johnny’s Seeds.
This is evidenced by the [laboratory reports].
Id. ¶ 34.
From April 1, 2010 to April 1, 2011 Johnny’s was insured under a commercial
general liability policy issued by OneBeacon.
Stip. Attach. 4 (ECF No. 22)
(OneBeacon Policy). From April 1, 2011 to April 1, 2012, Johnny’s was insured
under a commercial general liability policy issued by Massachusetts Bay.
Attach. 5 (ECF No. 22) (Massachusetts Bay Policy). Both policies include the form
“CG 00 01 12 07.” OneBeacon Policy at 047; Massachusetts Bay Policy at 115.2 This
form reads, in part:
We will pay those sums that the insured becomes legally
obligated to pay as damages because of “bodily injury” or
“property damage” to which this insurance applies. We
will have the right and duty to defend the insured against
any “suit” seeking those damages. However, we will have
no duty to defend the insured against any “suit” seeking
damages for “bodily injury” or “property damage” to which
this insurance does not apply. We may, at our discretion,
investigate any “occurrence” and settle any claim or “suit”
that may result.
This insurance applies to “bodily injury and “property
damage” only if:
The “bodily injury” or “property damage” occurs
during the policy period; and
Prior to the policy period, no insured listed under
Paragraph 1. of Section II – Who Is An Insured and
no “employee” authorized by you to give or receive
notice of an “occurrence” or claim, knew that the
“bodily injury” or “property damage” had occurred,
in whole or in part. If such a listed insured or
authorized “employee” knew, prior to the policy
period, that the “bodily injury” or “property
damage” occurred, then any continuation, change
or resumption of such “bodily injury” or “property
damage” during or after the policy period will be
deemed to have been known prior to the policy
Although the Stipulated Record is divided into separate Exhibits, the pagination of the
Exhibits is continuous throughout. The Court cites the continuous pagination of the Stipulated
Record, not the pagination of individual Exhibits within the Record.
“Bodily injury” or “property damage” which occurs during
the policy period and was not, prior to the policy period,
known to have occurred by any insured listed under
Paragraph 1. of Section II – Who Is An Insured or any
“employee” authorized by you to give or receive notice of
an “occurrence” or claim includes any continuation,
change or resumption of that “bodily injury” or “property
damage” after the end of the policy period.
“Bodily injury” or “property damage” will be deemed to
have been known to have occurred at the earliest time
when any insured listed under Paragraph 1. of Section II
– Who Is An Insured or any “employee” authorized by you
to give or receive notice of an “occurrence” or claim:
Receives a written or verbal demand or claim for
damages because of the “bodily injury” or “property
Becomes aware by any other means that “bodily
injury” or “property damage” has occurred or has
begun to occur.
OneBeacon Policy at 047-048; Massachusetts Bay Policy at 115. The policies define
“property damage” and “occurrence”:
“Occurrence” means an accident, including continuous or
repeated exposure to substantially the same general harmful
“Property damage” means:
Physical injury to tangible property, including all
resulting loss of use of that property. All such loss of use
shall be deemed to occur at the time of the physical injury
that caused it; or
Loss of use of tangible property that is not physically
injured. All such loss of use shall be deemed to occur at
the time of the “occurrence” that caused it.
OneBeacon Policy at 059-060; Massachusetts Bay Policy at 128-129.
The coverage of both policies is subject to exclusions for damage to the
This insurance does not apply to:
Damage To Your Product
“Property damage” to “your product” arising out of it or
any part of it.
OneBeacon Policy at 047, 050; Massachusetts Bay Policy at 116, 119.
Any goods or products, other than real property, manufactured,
sold, handled, distributed or disposed of by:
Others trading under your name; or
A person or organization whose business or assets you
have acquired; and
Containers (other than vehicles), materials, parts or equipment
furnished in connection with such goods or products.
OneBeacon Policy at 060; Massachusetts Bay Policy at 129. It also includes:
Warranties or representations made at any time with respect to
the fitness, quality, durability, performance or use of “your
The providing of or failure to provide warnings or instructions.
OneBeacon Policy at 060; Massachusetts Bay Policy at 129-130.
Both policies include endorsement CG 22 81 01 96, excluding claims for
“property damage” arising out of “[t]he erroneous delivery of seed, which includes . .
. the failure of the seed to germinate.” OneBeacon Policy at 062; Massachusetts Bay
Policy at 132.
Finally, both policies include endorsement CG 21 67 12 04, titled “Fungi or
Bacteria Exception.” OneBeacon Policy at 061; Massachusetts Bay Policy at 131.
This endorsement reads, in relevant part:
The following exclusion is added to Paragraph 2. Exclusions of
Section I – Coverage A – Bodily Injury And Property Damage
This insurance does not apply to:
Fungi Or Bacteria
“Bodily injury” or “property damage” which would
not have occurred, in whole or in part, but for the
actual, alleged or threatened inhalation of,
ingestion of, contact with, exposure to, existence of,
or presence of, any “fungi” or “bacteria” on or
within a building or structure, including its
contents, regardless of whether any other cause,
event, material or product contributed concurrently
or in any sequence to such injury or damage.
Any loss, cost or expenses arising out of the
abating, testing for, monitoring, cleaning up,
neutralizing, remediating or disposing of, or in any
way responding to, or assessing the effects of,
“fungi” or bacteria,” by any insured or by any other
person or entity.
This exclusion does not apply to any “fungi” or bacteria
that are, are on, or are contained in, a good or product
intended for bodily consumption.
The following definition is added to the Definitions Section:
“Fungi” means any type or form of fungus, including mold or
mildew and any mycotoxins, spores, scents or byproducts
produced or released by fungi.
OneBeacon Policy at 061; Massachusetts Bay Policy at 131.
Record Facts Extrinsic to the Complaint and Cross-Claim
The Stipulated Record in this case also includes certain evidence beyond the
Chatham-Kent Complaint, the Cross-Claim, and the relevant insurance policies.
On August 16, 2010, Barry Richards with Chatham-Kent emailed Mr. Pocock eleven
photos of Chatham-Kent’s corn crop. Stip. Attach. 10, at 185 (ECF No. 22). Mr.
Pocock forwarded this email to Chris Siladi at Johnny’s on August 24, 2010, asking
“[w]hat is Johnny’s stance on renumeration [sic] for terrible germination and
growth.” Id. The email of August 24 also suggests that corn growing in another,
adjacent field was healthy, asserting that “[t]his has been about the best growing
season we have had in years.” Id.
On September 24, 2010, Mr. Pocock sent Mr. Siladi an email giving him more
information about the failed crop. Id. at 186. In this email, Mr. Pocock claimed
that the crop “only grew to be in most cases 12 [inches] high and what cobs we did
get went right to rot . . . or did not grow at all.” Id. It also claimed that testing of
seed “right out of the bag” showed the presence of the pathogens Aspergillus,
Rhizopus, and Penicillium. Id. It also claimed that Mr. Pocock had been informed
by “the PHD who did this test” that the “pathogens can stay active in the soil via
the plant material. If any of the corn germinates next year it must be eradicated. . .
. [T]he best way to get rid of this is to spray pesticides to kill the plant.” Id.
The Stipulated Record also includes a report from A&L Canada Laboratories
Inc., dated September 22, 2010, indicating that testing on a “Corn kernel” sample
showed the presence of Aspergillus, Rhizopus, and Penicillium. Stip. Attach. 11 at
188 (ECF No. 22). This report states that Aspergillus and Penicillium “can cause
ear rot” and “Rhizopus is considered a secondary invader.” Id.
The record contains certain order inquiries and invoices regarding a
shipment of what appears to be the “Frisky” seed referenced in the Cross-Claim, to
a “Farmer Jacks” in London, Ontario. Stip. Attach. 6-8, at 179-83 (ECF No. 22). It
is not clear what relationship Farmer Jacks has to Chatham-Kent. Finally, the
record contains correspondence between counsel for Chatham-Kent, Johnny’s, and
cross-claimants Tri L and Mr. Pocock. Stip. Attach. 11-12, at 189-93 (ECF No. 22).
This correspondence discusses, primarily, the alleged damages in the underlying
The Status of the Ontario Suit
OneBeacon has provided Johnny’s with a defense subject to a reservation of
rights, including the right to commence a declaratory judgment action to resolve
OneBeacon’s duty to defend or indemnify Johnny’s. Pl.’s Mot. 3-4.3 Massachusetts
Bay refused to provide a defense. Id. at 4.4
Position of the Parties
The Insurers deny any duty to defend Johnny’s. Their theory, at its root, is
that even if one of the insurers were obliged to defend Johnny’s at the beginning of
This statement is not supported by the stipulated record; it is an assertion of counsel for the
Insurers. See Pl.’s Mot. 3-4. As Johnny’s does not dispute the statement, see Def.’s Mot., the Court
deems it established.
See supra note 3.
the suit, that duty evaporates if “developments . . . after the filing of a complaint”
show that there is no possibility that any of Johnny’s liability could come within the
insurance coverage. Pl.’s Mot. at 11. The Insurers claim that this could happen “as
a result of an amendment to the pleadings” or by establishing, in a declaratory
judgment action, uncontroverted facts that show non-coverage. Id. at 11-12.
The Insurers argue that there is no possible coverage for Johnny’s under the
Massachusetts Bay Policy because the seed involved in the suit was sold and
planted in the spring of 2010, and the harm was detected in August of that year.
Id. at 17. The Massachusetts Bay Policy was effective from April 1, 2011 to April 1,
2012. Id. They assert that “[t]he fact that an alleged contaminated condition that
existed in 2010 may have continued in existence into subsequent policy terms after
April 2011 does not implicate potential coverage under those policies with effective
dates after April 1, 2011.” Id.
The Insurers next argue for non-coverage under the OneBeacon Policy. They
contend that any claims arising out of the delivery of the wrong seed or the failure
of the seed to germinate falls into the exclusion of endorsement CG 22 81 01 96. Id.
at 18. They further argue that the claimed damage to the crops and to the soil falls
into the fungi or bacteria exclusion of endorsement CG 21 67 12 04. Id. at 19. This
is so, in their view, because the only way Johnny’s could be liable for the damage to
the crop or to the soil is if the seed became contaminated while in Johnny’s
possession. Id. at 19-20. They also argue that the damages from mediating the
contamination of the soil fall into the “remediation” component of the fungi or
bacteria exclusion. Id. at 20.
Johnny’s theory of the case revolves around the basic principle that under
Maine law the duty to defend depends solely on the allegations in the complaint and
the language of the insurance contract.
Def.’s Mot. at 10.
They first attack
Massachusetts Bay’s contention that its policy does not cover any of the events in
Johnny’s argues that, based solely on the allegations in the
Chatham-Kent Complaint, the seed could have been purchased in 2010 and not
planted until after April 1, 2011—during the Massachusetts Bay coverage period.
Id. They concede, however, that the OneBeacon policy is the only policy under
which there is any possible coverage for the more specific allegations of the CrossClaim. Id. This is because the dates alleged in the Cross-Claim are only within the
OneBeacon coverage period. Id.
Johnny’s also concedes that any damage “to the seed itself” falls into the
“Your Product” exclusion of both policies. Id. at 11; OneBeacon Policy 047, 050;
Massachusetts Bay Policy 116, 119. However, Johnny’s disputes that the “failure to
germinate” exception is applicable. Def.’s Mot. at 11. Johnny’s argues that neither
the Chatham-Kent Complaint nor the Cross-Claim alleges that the seed actually
failed to germinate; rather, Johnny’s maintains that the Chatham-Kent Complaint
and the Tri-L Defendants’ Cross-Claim allege that the damage occurred after
germination. Id. They further argue that even if either pleading claimed there was
a failure to germinate, the pleadings contain other claims independent of a failure
to germinate that would still obligate the Insurers to provide a defense. Id. at 12.
Next, Johnny’s denies that the fungi and bacteria exception relieves either
insurer of its duty to defend. Id. at 12-15. It argues that neither pleading contends
that the contamination by fungi resulted from “contact with, exposure to, existence
of, or presence of” fungi “within a building or structure or on the contents of a
building or structure.” Id. at 13. It maintains that Chatham-Kent or the Tri L
Defendants could prevail at trial without proving that the contamination occurred
in a building.
Specifically, Johnny’s could be liable if the contamination
occurred either before or after the seed was stored in a building. Id. at 14-15.
Because nothing in the pleadings would necessarily exclude coverage, Johnny’s
urges that the insurers remain under a duty to defend it. Id. at 15.
Johnny’s finally argues that it is entitled to attorney’s fees because Maine’s
law regarding the duty to defend, requiring defense if any set of facts proved to
support the allegations of the complaint could establish liability, was “clear” when
OneBeacon and Massachusetts Bay instituted this declaratory judgment action. Id.
at 15-16. It further argues that there is only one reasonable application of that law
to the facts of this case, making attorney’s fees an appropriate remedy. Id. at 16.
The Insurers’ Opposition
The Insurers reiterate their theory that “[t]he general rule is that an insurer
can rely upon uncontroverted extrinsic facts established in a declaratory judgment
action in resolving prospectively the duty to defend.” Pl.’s Opp’n at 2. It urges that
documents in the stipulated record show “the fact of when the alleged contaminated
seed was sold and planted, when the land allegedly was contaminated, and that the
contaminant was fungi.”
Id. The Insurers also argue that it is proper to consider
extrinsic evidence during a declaratory judgment action to determine the duty to
defend. Id. at 3. They distinguish their position in this declaratory judgment action
from rulings by the Maine Supreme Judicial Court that address the duty to defend
from the outset of a case. Id. at 3-4. Because they view the extrinsic facts in this
case as undisputed, they urge that they should be allowed to rely on them to
establish non-coverage. Id.
Turning to the fungi and bacteria exception, the Insurers reiterate their
position that the Chatham-Kent claim is “clearly . . . for losses associated with the
fungi contamination and the need to . . . remediate . . . that fungi contamination.”
Id. at 4-5. This, they argue, brings the entire claim within subsection (b) of the
exclusion. They next argue that an email from Mr. Pocock to a representative of
Johnny’s, referring to “terrible germination and growth,” establishes that the seeds
never germinated, implicating the failure to germinate exception. Id. at 5.
The Insurers dispute that Johnny’s is entitled to attorney’s fees if it should
prevail; it views the Maine case law as “sparse, especially with respect to the fact
pattern involved in this case.” Id. at 5-6. It argues that it took its position in this
matter in “good faith.” Id. at 5.
In reply, Johnny’s first disputes that any of the documents relied on by the
Insurers are actually referenced by pleadings.
Def.’s Reply at 1-2.
contends that because the pleadings do not formally incorporate those documents,
they should not be considered part of the pleadings, as the Insurers contend. Id.
Next, Johnny’s argues that the documents cited by the Insurers do not
necessarily show that the “contaminant” was fungi within the fungi or bacteria
exception. Id. at 2-3. Its argument turns on causation; fungi are not the only
pathogens that could have “contaminated” the seed, and the fact that the tested
seeds showed fungal pathogens does not necessarily mean that the seeds that were
actually planted had those pathogens. Id. Furthermore, Johnny’s disputes that the
presence of the fungi necessarily “contaminated” any of the seeds at all, or caused
the poor growth. Id. at 3.
Johnny’s next takes aim at the “general rule” put forth by the Insurers that
facts beyond the pleadings can be used in a declaratory judgment action to establish
no duty to defend. Id. at 4-10. It argues that the Insurers’ authority supports only
a limited use for extrinsic evidence in a declaratory judgment action, characterizing
them as narrow exceptions that prove the general rule. Id. at 4-5, 10-11. Johnny’s
also denies that the “general rule” cited by the Insurers is the law in Maine; Maine
law, Johnny’s contends, strictly forbids the use of facts outside the complaint when
evaluating the duty to defend. Id. at 5. It vigorously disputes any suggestion that
the facts allegedly establishing non-coverage are “undisputed”; it offers its own
conflicting interpretation of the documents that the Insurers cite. Id. at 5-10. It
offers these interpretations to show that it would be inappropriate to relieve the
Insurers of the duty to defend based on those facts; resolution of the disputed facts
would require litigating the underlying claim in a mini-trial. Id. at 5-10 & n.3.
Johnny’s closes its attack on the “general rule” allowing extrinsic evidence by
denying that there is any distinction between cases litigating the denial of defense
from the suit’s inception from declaratory judgment actions, as the Insurers
suggested. Id. at 11-14; Pl.’s Opp’n at 2-4.
Addressing the substance of the policy exclusions, Johnny’s renews its earlier
argument, denying that either the Chatham-Kent Complaint or the Cross-Claim
bring the suit into either the fungi or bacteria exclusion or the failure to germinate
Def.’s Reply at 14-17.
It vigorously denies that Mr. Pocock’s email,
referring to “terrible germination,” should limit the scope of Chatham-Kent’s claims,
or of the Cross-Claim, within the policy exclusion. Id. at 16. It also points to
another email, referenced in the Cross-Claim, from Mr. Saladi to Mr. Pocock
expressing surprise at the poor crop; Mr. Saladi, the Cross-Claim, recites,
“remember[s] when I spoke to you [Mr. Pocock] in late spring you stated that [the
crop] was doing fine.” Id. at 17; Cross-Claim ¶ 29. This suggests to Johnny’s, not
that the crop failed to germinate, but that it failed after germination. Def.’s Reply
Finally, on the topic of attorney’s fees, Johnny’s disputes the Insurers’
argument that the law in Maine is unclear, either in its substance or its proper
application to these facts.
Id. at 18-19.
Johnny’s views Maine law as
unambiguously favorable to its position, imposing on the Insurers a clear duty to
defend. Id. at 19.
Basic Framework and the Use of Extrinsic Evidence
When evaluating whether an insurer has a duty to provide a defense to its
insured, Maine has adopted the so-called “pleading comparison test”, Penney v.
Capitol City Transfer, 1998 ME 44, ¶ 6, 707 A.2d 387, 389. “We determine the duty
to defend by comparing the allegations in the underlying complaint with the
provisions of the insurance policy.” Id. 1998 ME 44, ¶ 4, 707 A.2d at 388 (quoting
Vigna v. Allstate Ins. Co., 686 A.2d 598, 599 (Me. 1996)); Mitchell v. Allstate Ins.
Co., 2011 ME 133, ¶ 9, 36 A.3d 876, 879 (“To determine whether an insurer has a
duty to defend, we compare the allegations of the underlying complaint with the
coverage provided in the insurance policy”).
“[A]n insurer must provide a defense if there is any potential that facts
ultimately proved could result in coverage.”
Id. ¶ 10 (emphasis in original).
Furthermore, “[a]ny ambiguity in the policy regarding the insurer’s duty to defend
is resolved against the insurer, . . . and policy exclusions are construed strictly
against the insurer.” Id. ¶ 11 (internal citations omitted). Evidence beyond the
pleadings and the insurance contract—“extrinsic evidence”—is normally ignored in
the analysis. E.g., Penney, 1998 ME 44, ¶¶ 4-5, 707 A.2d at 388-89.
In theory, Maine law allows an insurer to challenge its duty to defend based
on extrinsic facts that the insurer has discovered. Worcester Ins. Co. v. Dairyland
Ins. Co., 555 A.2d 1050, 1053 (Me. 1989); Commercial Union Ins. Co. v. Royal Ins.
Co., 658 A.2d 1081, 1083 (Me. 1995). In Worcester Insurance Company, the Law
Court considered extrinsic evidence that a gunshot wound by the defendant insured
was caused while loading a vehicle, which brought the injury within a policy
exception. 555 A.2d at 1053. The Worcester Court stated that “[f]acts known to an
insurer by investigation or otherwise which prove noncoverage ‘do not relieve the
insurer of its obligation to defend, unless the duty is discharged by means of a
declaratory judgment action.’” Id. at 1053 (quoting J. Appleman, 7C INSURANCE LAW
PRACTICE § 4683 (1979)); Commercial Union, 658 A.2d at 1082-83. In 1995, the
Maine Supreme Judicial Court reiterated its statement in Worcester that
“[e]xtrinsic facts known to the insurer may properly form the basis for a declaratory
judgment action.” Commercial Union, 658 A.2d at 1083. In practice, no Maine case
since Worcester Insurance Company has actually resolved a duty to defend based
even in part on extrinsic evidence. The Commercial Union Court concluded that
“[t]he facts in this case . . . do not support the exception Royal asks us to create.”
Commercial Union, 658 A.2d at 1083.
By contrast, there is a long string of cases in which the Law Court has
reinforced the rule that a duty to defend must be resolved by a pleading comparison
test, excluding extrinsic evidence. In 1977, the Law Court wrote that “the pleading
test for determination of the duty to defend is based exclusively on the facts as
alleged rather than on the facts as they actually are.” Amer. Policyholders’ Ins. Co.
v. Cumberland Cold Storage Co., 373 A.2d 247, 249 (Me. 1977) (emphasis in
original). In 1996 the Law Court squarely held that an insurer cannot “ordinarily”
avoid the duty to defend with extrinsic evidence of non-coverage:
evidence could conclusively establish the absence of a duty to indemnify, ordinarily
that evidence is irrelevant to the determination of the duty to defend.” N. Sec. Ins.
Co. v. Dolley, 669 A.2d 1320, 1323 (Me. 1996). The Maine Supreme Judicial Court
has explained the reason for this rule:
If we were to look beyond the complaint and engage in proof of actual
facts, then the separate declaratory judgment actions . . . would
become independent trials of the facts which the [insured] would have
to carry on at his expense . . . . We see no reason why the insured,
whose insurer is obligated by contract to defend him, should have to
try the facts in a suit against his insurer in order to obtain a defense.
Elliott v. Hanover Ins. Co., 1998 ME 138, ¶ 7, 711 A.2d 1310, 1312 (quoting
Travelers Indem. Co. v. Dingwell, 414 A.2d 220, 227 (Me. 1980)).
In 1996, the Dolley Court issued a dictum identifying the non-“ordinar[y]”
situations in which extrinsic evidence might be permissible:
For example, prior criminal convictions for murder, attempted murder
and sexual abuse of a child preclude any litigation over the issue of the
tortfeasor’s intent and therefore there is no duty to defend or
indemnify where the policy excludes intentional torts.
Dolley, 669 A.2d at 1322 n.3 (Me. 1996) (internal citations and quotations omitted).
A second area where extrinsic evidence might be allowed is where the insurer
disputes its duties to defend and indemnify “based on facts that are not related to
the question of the insured’s liability, such as ‘nonpayment of a premium,
cancellation of a policy, failure to cooperate or lack of timely notice.’” North East
Ins. Co. v. Young, 2011 ME 89, ¶ 15, 26 A.3d 794, 799 (quoting Patrons Oxford Mut.
Ins. Co. v. Garcia, 1998 ME 38, ¶ 7, 707 A.2d 384, 386); State Farm Mut. Auto. Ins.
Co. v. Koshy, 2010 ME 44 ¶ 63, 995 A.2d 651, 670. In North East, the Law Court
explained this narrow second exception to the rule against extrinsic evidence as
allowing such evidence because “the coverage dispute depends entirely on the
relationship between the insurer and the insured, not on facts to be determined in
the underlying litigation.” North East, 2011 ME 89, ¶ 15, 26 A.3d at 799.
Outside these narrowly construed exceptions, the Law Court has consistently
reinforced the “policy comparison test” to the exclusion of extrinsic evidence. Cox v.
Commonwealth Land Title Ins. Co., 2013 ME 8, ¶ 9, 59 A.3d 1280, 1283
(“Regardless of extrinsic evidence, if the complaint—read in conjunction with the
policy—reveals a mere potential that the facts may come within the coverage, then
the duty to defend exists”); York Ins. Group v. Lambert, 1999 ME 173, ¶ 5, 740 A.2d
984, 985 (“Lambert contends that the court erred when it looked beyond the
pleadings and considered evidence extrinsic to the complaint. We agree.”); Elliott,
1998 ME 138, ¶ 7, 711 A.2d at 1312; Penney, 1998 ME 44, ¶ 5, 707 A.2d at 388-89;
Garcia, 1998 ME 38, ¶¶ 5-8, 707 A.2d at 385-86; Dingwell, 414 A.2d at 227.
Proper Use of the “Extrinsic Evidence” in This Case
The parties have debated the scope of permissible use of “extrinsic evidence”
in this case.
The Insurers assert that the Court may consider documents
“referenced in the pleadings.” Pls.’ Opp’n at 2. Johnny’s maintains that merely
because a document is mentioned in a pleading does not mean that “its contents can
be considered part of the pleading.” Def.’s Reply at 2.
To resolve this part of the parties’ dispute, the Court is not required to slice
the fine distinction between “referenced” and “attached” for the purposes of the
pleadings comparison test. The problem with considering the documents that the
Insurers want considered is that the parties do not agree on what the referenced
documents mean. Thus, even if the parties agree that the referenced documents are
what they purport to be, FED. R. EVID. 901(a), the parties do not agree on how the
Court should interpret the documents. The resolution of this factual issue must
await the underlying trial. For purposes of the pleading comparison test, this Court
may not “engage in proof of actual facts” by favoring one interpretation over another
in order to resolve the duty to defend. Elliot, 1998 ME 138, ¶ 7, 711 A.2d at 1312
(quoting Dingwell, 414 A.2d at 227).
Application of the Comparison Test
Johnny’s concedes that the Massachusetts Bay policy does not cover the facts
alleged in the Cross-Claim.
Def.’s Mot. at 10.
Therefore, the Court need only
consider whether the Chatham-Kent Complaint shows “any potential that facts
ultimately proved could result in coverage.” Mitchell, 2011 ME 133, ¶ 10, 36 A.3d at
879 (emphasis in original).
The Chatham-Kent Complaint alleges only that in April of 2010 ChathamKent purchased seeds from a distributor that acquired the seeds from Johnny’s.
Chatham-Kent Complaint ¶¶ 4-5. It does not specify when Chatham-Kent planted
the seeds; it only claims that the seeds were contaminated (with an unidentified
contaminant) and that the contamination harmed Chatham-Kent’s fields. Id. ¶ 6.
Chatham-Kent could prevail on its Complaint by proving that it planted the seeds
in 2011—during Massachusetts Bay’s coverage period—and that the contamination
had nothing to do with fungi or bacteria. If this were proven, Johnny’s could be
exposed to liability for which Massachusetts Bay agreed to provide coverage.
Therefore, Massachusetts Bay has a duty to defend Johnny’s against the ChathamKent Complaint.
First, OneBeacon has the duty to defend Johnny’s against the Chatham-Kent
Complaint for the same reasons Massachusetts Bay has the duty to defend.
OneBeacon also has a duty to defend Johnny’s against the Cross-Claim.
The Cross-Claim alleges that Tri L purchased certain seeds, identified by
brand but not by species, from Johnny’s in March and April of 2010, during the
OneBeacon coverage period. Cross-Claim ¶ 19. It also alleges that Chatham-Kent
reported “spoiled corn crops” in August 2010. Id. ¶ 23. It further alleges that
laboratory testing on “the corn seed supplied by Johnny’s” returned positive results
for three fungal pathogens. Id. ¶ 27. It alleges that soil samples from the stricken
fields tested positive for all three pathogens. Id. ¶¶ 30, 33. Finally, it alleges that
“[t]he seed supplied by Johnny’s Seeds caused the crop contamination that are [sic]
the subject of the within action. In particular, the [lab reports] confirm that the
supplied seed . . . was defective.” Id. ¶ 44.
The policy exclusion for fungus or bacteria on which OneBeacon primarily
relies, Form CG 21 67 12 04, excludes property damage “which would not have
occurred, in whole or in part, but for the . . . exposure to, existence of, or presence of,
any ‘fungi’ or ‘bacteria’ on or within a building or structure, including its contents.”
OneBeacon Policy at 061. However, nothing in the Complaint alleges, suggests, or
requires that the fungal contamination of the seed and soil was due to its storage on
or within a building or structure, or even that the seed was ever stored in a building
of any sort. Tri L and Mr. Pocock could prevail on their cross-claim by proving that
the seed became contaminated with the fungal pathogens before or after it left a
structure while still in Johnny’s control, or even by proving that Johnny’s never
stored the seed in a structure.5 An exclusion from coverage must be construed
strictly against the insurer, Mitchell, 2011 ME 133, ¶ 11, 36 A.3d 876, and
OneBeacon’s exclusion is limited to fungus or bacteria attributable to a building or
its “contents.” Even if portions of the cost of remediating the soil are excluded by
the second subsection of the exclusion, the destruction of the crop itself and the
alleged damage to the soil would not be excluded; they are not damages for
“remediation.” In short, the fungus or bacteria exclusion of CG 21 67 12 04 does not
obviate OneBeacon’s duty to defend because the cross-claimants could prevail
against Johnny’s on facts that implicate at least some coverage.
The failure to germinate exclusion, form CG 22 81 01 96, also fails to defeat
the duty to defend. The cross-claimants make no allegations about whether the
seed germinated. See Cross-Claim. Nothing about their legal theories requires a
failure to germinate; indeed, paragraph 23 of the Cross-Claim alleges that
Chatham-Kent discovered the spoiled crops on August 16, 2010, some four months
after Johnny’s shipped the last batch of seed. “Spoilage” of a crop does not require
For instance, the cross-claimants might prove that the seed became contaminated while
Johnny’s was harvesting it, before it entered a structure. They might also prove that Johnny’s
stored the seed outside for some period of time, after removing it from a structure, during which
period it became contaminated with the pathogens. In either case, the harm would not fall into the
or suggest failure to germinate. Nothing about the Cross-Claim brings it within the
exclusion of CG 22 81 01 96, and so OneBeacon still has a duty to defend Johnny’s.
Having concluded that OneBeacon and Massachusetts Bay have a duty to
defend Johnny’s against the Chatham-Kent Complaint and the Cross-Claim, the
Court now considers whether Johnny’s should be awarded its attorney’s fees in
defending this declaratory judgment action.
The Insurers are correct that the
“American Rule” at common law “generally prohibits taxing the losing party in
litigation with a successful opponent’s attorney fees.” Gibson v. Farm Family Mut.
Ins. Co., 673 A.2d 1350, 1354 (Me. 1996). Absent statutory authority, a contractual
provision, or a limited number of common law authorizations, each party must pay
its own attorney regardless of the outcome of the litigation. Id.
Maine, however, has carved out an exception to the American Rule in
disputes between insurers and insureds over the duty to defend. Id. In the words of
the Maine Law Court, “the special relationship between insurer and insured
entitles an insured in certain circumstances to an award of attorney fees incurred in
establishing the insurer’s duty to defend.” Id. In Union Mutual Fire Insurance Co.
v. Inhabitants of the Town of Topsham, 441 A.2d 1012 (Me. 1982), the Maine
Supreme Judicial Court explained that “[b]ecause the liability insurer’s duty of
defense is so extensive and the burden on the insured of a breach of that duty is
likely to be so heavy, we conclude that the insurer should not enjoy the usual
freedom to litigate without concern about the possibility of having to pay the other
party’s attorneys’ fees.” Id. at 1019. The Law Court announced the standard to
determine whether to award of attorney’s fees to the insured:
When the duty to defend is clear from the policy and the pleadings, so
that the insurer’s commencement of the declaratory judgment action
must be attributed to a refusal in bad faith to honor its obligation
under the policy, the insured should be entitled to his reasonable
attorneys’ fees in defending the declaratory judgment action as an
element of damages for the insurer’s breach of its contract obligation.
The Maine Supreme Judicial Court later explained that “[t]o determine
whether a duty to defend is ‘clear’ for purposes of awarding attorney fees, a court
must evaluate state law regarding an insurer’s duty to defend as it existed at the
time the insurer initiated the declaratory judgment action.” Me. Mut. Fire Ins. Co.
v. Gervais, 1999 ME 134, ¶ 6, 745 A.2d 360, 362.
Here, the Insurers argued that the Court could consider “extrinsic facts
demonstrated by documents in the record” to determine whether they owed a duty
to defend. Pls.’ Mot. at 13-14. The Insurers went on to argue:
To the extent the Plaintiffs rely on those extrinsic facts, the facts are
not in dispute, do not necessitate a mini trial or duplicate trial, and are
not contested facts in the underlying case yet to be resolved.
Id. at 14. Even if the Insurers were arguably correct that the Court could consider
documents referenced in the Complaint, it was or should have been clear that the
meaning of those documents was in dispute. Therefore, to the extent the Insurers’
After Union Mutual, the Maine Legislature enacted a provision that requires insurers to pay
the attorneys’ fees of an insured if the insured prevails in an action to enforce the duty to defend. 24A M.R.S. § 2436-B. However, the statute applies only to “a natural person” and excludes
corporations. § 2436-B(1); Foremost Ins. Co. v. Levesque, 2007 ME 96, ¶ 7, 926 A.2d 1185, 1188.
declaratory judgment action was premised on an assumption that facts obviously in
dispute were not in dispute, the duty to defend was clear.
Next, assuming that the Insurers should have known that the Court would
not consider contested facts that were intertwined with the issues in underlying
action, the next question is whether the duty to defend should have been clear.
Here, the Insurers conceded that the claim fell within the grant of coverage and
therefore the Insurers bore the burden to establish that coverage was excluded. Id.
at 14. Massachusetts Bay maintained that its policy could not have covered the
claim because “the inception date of the earliest Massachusetts Bay policy is after
the sale and planting of the alleged contaminated seeds, the failed crop in the
summer of 2010 and the alleged contamination of the farm land in 2010.” Id. But,
as the Court has pointed out, the only date in the Complaint is the date the seeds
The Plaintiff states that in or about the month of April 2010 the
Plaintiff, Chatham-Kent Organic Epi-Centre Inc., purchased various
organic agricultural seeds from the Defendants, Tri L Natural Organic
Farms Inc., Natural Organic Farms Inc. and Larry Pocock, in order to
plant organic agricultural crops on their lands.
Compl. ¶ 6.
Otherwise, there are no dates at all alleged in the Complaint.
Specifically, the Complaint does not allege that Plaintiff planted and harvested the
allegedly defective crop in 2010. Accordingly, there is no basis to conclude on the
face of the allegations in the Complaint that the Plaintiff planted or harvested the
allegedly defective crop within or outside Massachusetts Bay’s policy period. To
infuse dates into the Complaint, the Court would have to travel outside its
allegations and considered documents, the significance of which is in dispute. Thus,
the Court concludes that Massachusetts Bay was clearly wrong in its contention
that its coverage was necessarily outside the dates in an underlying complaint that
was substantially devoid of dates.
Finally both Insurers asserted that coverage was excluded under both
commercial general liability policies.
However, the exclusions upon which the
Insurers rely depend on their ability to prove facts that are not alleged in the
Complaint and the Cross-Claim.
Accordingly, the Court views the Insurers’
contention that they owed no duty to defend based on matters extrinsic to the
Complaint and Cross-Claim to have been clearly wrong.
Under Gibbons, because the duty to defend was clear from a comparison of
the insurance policy and the Complaint and Cross-claim, Johnny’s is entitled to its
attorney’s fees and costs in defending this declaratory judgment action paid by the
Insurers. Barrett Paving Materials, Inc. v. Continental Ins. Co., 488 F.3d 59, 65 (1st
Cir. 2007); Pro Con, Inc. v. Interstate Fire & Cas. Co., 831 F. Supp. 2d 367, 372-76
(D. Me. 2011).
The Court DECLARES that both Plaintiffs have a duty to defend the
Defendant against the Chatham-Kent Complaint and that OneBeacon has a duty to
defend the Defendant against the Cross-Claim. The Court further ORDERS the
Defendant to file a motion for attorney’s fees in accordance with Federal Rule of
Civil Procedure 54(d)(2) and District of Maine Local Rule 54.2.
/s/ John A. Woodcock, Jr.
JOHN A. WOODCOCK, JR.
CHIEF UNITED STATES DISTRICT JUDGE
Dated this 17th day of April, 2014
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